Commentary
Follow through buying was seen in the Chicago wheat today and to a lesser extent Corn. Chicago wheat has rallied 80 cents in two days and the rally comes on two fronts. First, a potential tightening of global exportable surplus wheat on the World market helped drive prices higher yesterday as Russia announced over the weekend that they have pulled out of the Ukrainian export grain corridor deal. Second, USDA’s initial national ratings for U.S. winter wheat pegged the crop at 28% “good” or “excellent” as of Sunday, far under expectations for 41% and a record low. The crop was 87% planted, up from 79% the previous week and ahead of the 85% five-year average. When USDA’s weekly crop condition ratings are plugged into the weighted Pro Farmer Crop Condition Index (0 to 500 scale, with 500 being perfect), the HRW or KC crop starts the growing season at 265.8, the lowest initial rating ever and the lowest on record for any week ahead of dormancy. It is important to note that funds came in short last week in Chicago wheat short 36,777 contracts as of last Tuesday. I would imagine the Monday/Tuesday rally saw algos buying back these short positions to go flat. Question is do they start to build a long position in the market? With this possibility, I am suggesting a course of action in the KC wheat market using a diagonal strategy. While managed funds are short over 36K contracts of Chicago per CFTC’s last report, they are long KC about 24K as of last week with that number now most likely being understated given the rally. KC though is where the problems are and if needed moisture fails to show up, conditions may not get better into dormancy.
Trade Ideas
Futures-N/A
Options-Buy the January 23 10.00 Chicago Wheat call and sell the March 23 11.00 call for a cost of 2 cents ($100), plus trade costs and fees. Symbol: KEH23C1100:F23C1000[DG]
Risk/Reward
Futures-N/A
Options: The cost to enter the trade is 2 cents plus commissions and fees. However, this isn’t the risk as we are long a January call vs short a March 23 call. The short option has a longer expiration and is the risk here. I’m holding this position until early December with the caveat that as one enters into the position as a spread, we exit as a spread. This is a volatility play, where we see the potential for KC wheat to rally to the 50 percent retracement almost a Dollar higher at 10.90. This, if it occurred would put the front leg of the spread 90 cents in the money. Should we not rally and fail at 10.00, I will risk no more than 10 cents from entry essentially putting a stop loss at approximately $500.00 per spread plus commissions and fees.
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Sean Lusk
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